Prepaid Interest

DEFINITION of 'Prepaid Interest'

The interest that a debtor pays before the first scheduled debt repayment. For taxation purposes, most kinds of prepaid interest are expensed over the life of the loan.

For mortgage loans, prepaid interest can also be the interim interest that accrues from the settlement day to the beginning of the first mortgage period.

BREAKING DOWN 'Prepaid Interest'

Points, a kind of fee that mortgage lenders charge borrowers, are considered a type of prepaid interest. Similar to other types of prepaid interest, points are typically deducted over the life of the loan (in this case, a mortgage). However, provided that certain conditions are met, the IRS does allow this type of prepaid interest to be deducted in the year in which it is paid.

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